Business, 05.05.2020 16:43 reinasuarez964

Consider the central bank balance sheet for the country of Riqueza. Riqueza currently has 2,000 million escudos in its money supply, 1,200 million escudos of which is backed by domestic government bonds; the rest is backed by foreign exchange reserves. Assume that Riqueza maintains a fixed exchange rate of one escudo per dollar, the foreign interest rate remains unchanged, and money demand takes the usual form, M/P = L(i)Y. Assume prices are sticky.
Suppose that Riqueza’s central bank buys 400million escudos in government bonds. Show how this affects the central bank balance sheet. Does this change affect Riqueza’s money supply?
Explain why or why not. What is the backing ratio now?

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Consider the central bank balance sheet for the country of Riqueza. Riqueza currently has 2,000 mill...

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